Non-compatible duties performed by separate individuals- such as

Accounting should be segregated from Production

26

With respect to signing checks - how are duties segregated?

Employees who prepare vouchers/invoices should not also have the authority to SIGN CHECKS

Tip - Remember this as an underlying theme with Segregation of Duties. The authority to make a payment should not also lie in the hands of those creating invoices/vouchers. Why? People commit fraud by setting up fake companies and basically paying themselves

27

With respect to custody of assets - how should duties be segregated?

Employees who have custody of assets should not also RECORD those assets

Someone in charge of petty cash should not also control the petty cash records

Treasury Department (custodians) should NOT have record keeping duties

They control assets and should not be able to adjust any recording of those assets

28

What are the limitations on Control Activities?

Controls can't stop collusion or bad judgment

Management can override controls

Cost vs. Benefit relationship of Internal Control

29

What is required if a Material Weakness is identified?

A written report to management is required.

Report declaring that no material weaknesses were found is allowed

Previous weaknesses reported that still exist should be reported again

Should be reported no later than 60 days after audit report release date

If one or more material weaknesses is uncorrected at year-end- an Adverse Opinion on Internal Control must be given

30

What is the effect of a Significant Deficiency? What is it?

A significant deficiency adversely affects a company's ability to report in the financial statements according to GAAP.

A significant deficiency is a more than a remote likelihood of material misstatement by more than an inconsequential amount

31

What must occur if a Significant Deficiency is identified?

If a Significant Deficiency is identified- a written report to management required

Report declaring that no significant deficiencies exist is not allowed

Previous deficiencies reported that still exist should be reported again

Should be reported no later than 60 days after the audit report release date

32

What is a Control Deficiency?

A control is not operating as intended.

33

What must an auditor ask if using the work of third parties?

Are they competent?

Are they objective?

34

What must an auditor understand with respect to internal auditors?

Auditor needs to understand the role of Internal Auditors within the organization because their work affects the audit plan

Responsibility for judgments about materiality or appropriateness of entries or estimates cannot be shared with third parties like Internal Auditors

Internal Auditors should be asked to do some of the legwork like preparing schedules or running reports

They should not be asked to make any decisions or judgments

35

What is required in an examination of Internal Control under Sarbanes-Oxley?

CEO/CFO must disclose deficiencies

Management must provide assessment of Internal Controls

Management must certify Financial Statements

36

What is the relationship between Internal Control and Substantive Testing?